The SMSF Association has welcomed findings that limited recourse borrowing arrangements (LRBAs) pose no material risk to broader financial systems but acknowledged the risk of “one-stop property shop” advocating LRBAs and providing unlicensed personal advice remain a concern.

In a media release on Thursday morning, the peak industry body for SMSF advisers noted the report from the Council of Financial Regulators found LRBAs posed no material risk to the superannuation or broader financial system.

However, it found conflicted and poor-quality advice provided to individuals over the use of LRBAs could put consumers’ retirement savings at risk.

SMSF Association chief executive John Maroney said “one-stop property shops” advocating LRBAs and providing unlicensed personal advice remain a concern.

“We have long supported a crackdown on their activities and believe ASIC has done much to curtail their nefarious activities.”

“But the fact they still operate highlights the need for the entire sector to remain vigilant to ensure this debt instrument remains available to the vast majority who use it responsibly.”

Experts previously noted to Professional Planner that AFCA determinations for poor advice often relate to lack of diversification in SMSFs where the fund focused on a small pool of physical property.

The need for advice

The CFR report is a follow up to a similar one conduced in 2019 which studied leverage in the superannuation system.

The 2019 report found LRBAs could pose a significant risk to some individuals’ retirement income, particularly with low-balance SMSFs, which the 2022 version of the report echoed.

“As the majority of LRBAs are used to purchase real property, a property market correction could pose a significant risk, in particular where a personal guarantee is involved,” the 2019 report said.

“These risks can be exacerbated where the decision to enter into a LRBA is based on poor-quality advice, as recently demonstrated through the Royal Commission’s hearings.”

One of the recommendations was an outright ban on LRBAs which Maroney said could be avoided by mitigating risks to this SMSF asset class.

“What has occurred in the intervening three years reinforces our view that a ban on LRBAs would be overkill, with the report highlighting that SMSF borrowings remain a small percentage of total SMSF assets and, as such, pose little risk to financial stability while assisting many small businesses, in particular, meet their retirement income goals,” Maroney said.